Last year, we warned that treating digital music sales as the savior of the market was a dangerous thing, since there were indications that the market was fragile. In fact, we had already seen that after years of major record labels pleading with Apple to let them raise prices on songs, the initial results suggested a decrease in sales. Well, shockingly enough, it looks like the basic econ 101 concept of price elasticity works in music as well, as Warner Music has finally realized that raising prices of songs to $1.29 has slowed growth in the market. The digital music market, which had been growing pretty rapidly, slowed drastically following this pricing change. Warner Music is claiming that this this is because the market has “matured,” but gives no evidence of that whatsoever — and given the size of the market, that seems highly unlikely. Now, to be clear, the market is still growing, but only at 8% as compared to 20% the year before. And market growth should be expected to decline over time once the market matures, but it’s difficult to believe that the digital music market has reached the point of maturity yet. In fact, just a few weeks ago, we wrote about an economic study that suggested that if the labels wanted to maximize revenue on digital sales, they should be lowering prices. But, again, execs at major labels haven’t been known to be particularly good with their understanding of economics.
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